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The value of mortgage prepayment and default options

✍ Scribed by Yong Chen; Michael Connolly; Wenjin Tang; Tie Su

Publisher: John Wiley and Sons
Year: 2009
Tongue: English
Weight: 269 KB
Volume: 29
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20388

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

We use an implicit alternating direction numerical procedure to estimate the value of a fixed‐rate mortgage (FRM) with embedded default and prepayment options. The value of FRMs depends on interest rates, the house value, and mortgage maturity. Our numerical results suggest that the joint option value of prepayment and default is considerably high, even at loan origination. We extend the model to include prepayment penalties in FRM valuation. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:840–861, 2009

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